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| MCFI.OB > SEC Filings for MCFI.OB > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
Statements in this Report and its exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission from time to time. Copies of those reports are available directly through the SEC's Internet website at www.sec.gov or through our Internet website at www.midcarolinabank.com. Forward-looking statements may be identified by terms such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "forecasts," "potential" or "continue," or similar terms or the negative of these terms, or other statements concerning opinions or judgments of our management about future events. Factors that could influence the accuracy of forward-looking statements include, but are not limited to, (a) pressures on the earnings, capital and liquidity of financial institutions resulting from current and future adverse conditions in the credit and capital markets and the banking industry in general, (b) the financial success or changing strategies of our customers, (c) actions of government regulators, the level of market interest rates, and changes in general economic conditions and real estate values in our banking market (particularly changes that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of loan collateral). Although we believe that the expectations reflected in the forward-looking statements are reasonable, they represent our management's judgments only as of the date they are made, and we cannot guarantee future results, levels of activity, performance or achievements. As a result, readers are cautioned not to place undue reliance on these forward-looking statements. All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements in this paragraph. We have no obligation, and do not intend, to update these forward-looking statements.
In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced, including:
• The Emergency Economic Stabilization Act, approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase troubled assets from banks, authorized the Securities and Exchange Commission to suspend the application of mark-to market accounting, and temporarily raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 (with a return to the $100,000 limit on December 31, 2009;
• On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance:
• On October 14, 2008, the U.S. Treasury announced the creation of a new program, the TARP Capital Purchase Program, that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable;
• On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (TLGP), which seeks to strengthen confidence and encourage liquidity in the banking system, and which has two primary components that are available on a voluntary basis to financial institutions, including:
• Guarantee of newly-issued senior unsecured debt issued on or before June 30, 2009 (subject to certain limits) and which would be in effect until June 30, 2012; issuers electing to participate would pay a 75 basis point fee for the guarantee;
• Unlimited deposit insurance for non-interest bearing deposit transaction accounts; financial institutions electing to participate will pay a 10 basis point premium in addition to the insurance premiums paid for standard deposit insurance;
The Company is currently evaluating the programs outlined above and the impact they may have on the organization. As a result of the enhancements to deposit insurance protection and the expectation that there will be demands on the FDIC's deposit insurance fund, it is clear that our deposit insurance costs will increase significantly during 2009.
Although it is unknown whether further regulatory actions will arise as the Federal government attempts to address the economic situation, management is not aware of any further recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.
During the three-month period ending September 30, 2008, our total assets increased by $54.4 million to $521.6 million from $467.2 million at December 31, 2007. At September 30, 2008, loans totaled $418.9 million, an increase of $47.2 million, or 12.70%, for the nine months, as loan demand continues to be strong in our markets. Our loan portfolio experienced increases in real estate and commercial loans in the amount of $35.5 million and $12.8 million, respectively. Consumer loans decreased by $1.1 million to $4.7 million. Federal funds sold and interest-earning deposits increased by $9.5 million, to $12.5 million.
Our total liquid assets, which include cash and due from banks, federal funds sold and interest-earning deposits at Federal Home Loan Bank ("FHLB") of Atlanta, investment securities and loans held for sale increased by $7.9 million during the nine months, to $84.2 million or 16.13% of total assets at September 30, 2008 versus $76.2 million, or 16.31% of total assets, at December 31, 2007. At September 30, 2008, investment securities available for sale totaled $70.0 million, a decrease of $826,000, or 1.17% compared to December 31, 2007.
Deposits continue to be our primary funding source. At September 30, 2008, deposits totaled $443.4 million, an increase of $69.5 million, or 18.59%, from year-end 2007. Included in the deposit balances are $123.2 million of brokered certificates of deposit, an increase of $35.5 million, or 40.47%, from year-end. We also utilize borrowings from the FHLB to support balance sheet management and growth. Borrowings from the FHLB decreased by $16.0 million, or 32.65%, to $33.0 million at September 30, 2008.
Our capital position remains strong, with all of our regulatory capital ratios at levels that make us "well capitalized" under federal bank regulatory capital guidelines. At September 30, 2008, our shareholders' equity totaled $35.4 million, an increase of $2.2 million from the December 31, 2007 balance. This increase resulted from net income available to common shareholders of $2.9 million for the nine month period, proceeds from the exercise of stock options in the amount of $762,000 and a current income tax benefit associated with the exercise of stock options in the amount of $498,000. Accumulated other comprehensive loss increased in the amount of $2.0 million for the nine-month period ended September 30, 2008 resulting from the illiquid securities markets affecting the Company's unrealized loss on available-for-sale Municipal securities and Mortgage Backed securities portfolios.
Net Income. Our net income available for common shareholders for the three months ended September 30, 2008 was $1.139 million, an increase of $38,000, or 3.45%, from net income available to common shareholders of $1.101 million for the same three-month period in 2007. Net income per diluted share of
$0.23 remained unchanged when compared to the prior period. We have experienced strong balance sheet growth, with total assets averaging $515.7 million during the current three-month period compared to $456.0 million in the comparative prior year period, an increase of 13.10%. Our interest rate spread and net yield on average interest-earning assets increased 24 basis points and 7 basis points respectively. Net interest income increased $529,000, non-interest income for the quarter ended September 30, 2008 increased in the amount of $495,000, the provision for loan losses increased $705,000, and non-interest expenses increased $206,000 for the comparative period.
Net Interest Income. Net interest income increased by $529,000, or 15.50%, to $3.9 million for the three months ended September 30, 2008. Our total interest income benefited from growth in the level of average earning assets offset by a decrease in asset yields caused by decreases in interest rates charged on loans. The rates earned on a significant portion of our loans adjust immediately when index rates such as prime rate change. Conversely, most of our interest-bearing liabilities, including certificates of deposit and borrowings, have rates fixed until maturity. As a result, interest rate reductions will generally result in an immediate drop in our interest income on loans, with a more delayed impact on interest expense because reductions in interest costs will only occur upon renewals of certificates of deposit or fixed rate FHLB advances. Conversely, interest rate increases should result in an immediate increase in our interest income on loans, with a more delayed impact on interest expense because increases in interest costs will occur upon renewals of certificates of deposits or borrowings. Average interest-earning assets during the third quarter of 2008 increased $59.4 million, or 13.37%, as compared with the same period in 2007. Our average yield on total interest-earning assets decreased by 127 basis points from 7.20% to 5.93%. Our average total interest-bearing liabilities increased by $49.4 million, or 12.75%. Our average cost of total interest-bearing liabilities decreased 151 basis points from 4.75% to 3.24%. Our markets are extremely competitive for deposits. For the three months ended September 30, 2008, our net interest spread was 2.69% and our net interest margin was 3.12%. For the three months ended September 30, 2007, our net interest rate spread was 2.45% and our net interest margin was 3.05%.
Provision for Loan Losses. Based on the uncertainty of the local and national economy, trends in the level of delinquent and classified loans as well as the over all growth of the loan portfolio, the Bank made a $705,000 provision for loan losses during the three months ended September 30, 2008. No provision was made for loan losses during the three months ended September 30, 2007. Provisions for loan losses are charged to income to maintain the allowance for loan losses at a level deemed appropriate by management. Loan recoveries of previously charged-off loans were $6,000 during the three months ended September 30, 2008, offset by $163,000 of loan charge-offs. At September 30, 2008, we had non-accrual loans in the amount of $2.6 million of which $2.2 million is related to an independent retail grocer and meat market, while the allowance for loan losses increased $548,000 to $5.4 million, or 1.28% of total loans. At September 30, 2007, we had non-accrual loans in the amount of $266,000, while the allowance for loan losses decreased $80,000 to $4.1 million, or 1.14% of total loans. The Bank holds secured positions in these non-accrual loans. At December 31, 2007, the Bank had non-accrual loans in the amount of $700,000, while the allowance for loan losses stood at $4.5 million, or 1.20% of total loans.
Non-Interest Income. For the third quarter of 2008, non-interest income increased $495,000, or 75.34%, to $1,152,000 from $657,000 for the same period the prior year. Changes for the three months ended September 30, 2008 include an increase of $36,000 in service charges and fees on deposits, an increase of $536,000 in gain on sale of other real estate realized substantially from the re-sale of property originally foreclosed during 2004 from a single borrower, an increase in cash value of life insurance of $3,000, a decrease in gain on sale of investments of $1,000, a decrease in mortgage brokerage activities of $29,000, a decrease in income from brokerage services of $13,000 and an increase in all other non-interest income of $3,000.
Non-Interest Expense. We strive to maintain levels of non-interest expense that we believe are appropriate given the nature of our operations and the investments in personnel and facilities that have been necessary to generate growth. For the three-months ended September 30, 2008, total non-interest expense increased $246,000 from the prior year period. Salary and employee benefit expenses increased $50,000, reflecting staffing changes undertaken during the period. Deposit and other insurance expense decreased $2,000. Occupancy and equipment costs decreased $8,000 reflecting decreased depreciation expenses and the termination of an automobile lease, advertising expense increased $7,000 due to an increase in our advertising and marketing budget. Professional and other services and data processing and other outside services increased a combined $116,000 primarily due to increases in legal services.
Provision for Income Taxes. Our provision for income taxes, as a percentage of income before income taxes, was 33.10% and 30.94%, respectively, for the three months ended September 30, 2008 and 2007. The increase in the tax rate accrual is due to a decrease in tax-free federal and state income.
Net Income. Our net income available for common shareholders for the nine months ended September 30, 2008 was $2.912 million, a decrease of $64,000, or 2.15%, from net income available to common shareholders of $2.976 million for the same nine-month period in 2007. Net income per diluted share of $0.59 decreased $0.02 per diluted share compared to the prior period. We have experienced strong balance sheet growth, with total assets averaging $498.3 million during the current nine-month period compared to $441.3 million in the comparative prior year period, an increase of 12.91%. Our interest rate spread and net yield on average interest-earning assets decreased 6 basis points and 17 basis points respectively. Net interest income increased $774,000, non-interest income for the nine months ended September 30, 2008 increased in the amount of $691,000, the provision for loan losses increased $1,155,000, and non-interest expenses increased by $231,000 for the comparative period.
Net Interest Income. Net interest income increased by $774,000, or 7.81%, to $10.7 million for the nine months ended September 30, 2008. Our total interest income benefited from growth in the level of average earning assets which was offset by a decrease in asset yields caused by decreases in interest rates charged on loans. The rates earned on a significant portion of our loans adjust immediately when index rates such as our prime rate change. Conversely, most of our interest-bearing liabilities, including certificates of deposit and borrowings, have rates fixed until maturity. As a result, interest rate reductions will generally result in an immediate drop in our interest income on loans, with a more delayed impact on interest expense because reductions in interest costs will only occur upon renewals of certificates of deposit or fixed rate FHLB advances. Conversely, interest rate increases should result in an immediate increase in our interest income on loans, with a more delayed impact on interest expense because increases in interest costs will occur upon renewals of certificates of deposits or borrowings. Average interest-earning assets during the first nine months of 2008 increased $59.0 million, or 13.93%, as compared with the same period in 2007. Our average yield on total interest-earning assets decreased by 107 basis points from 7.27% to 6.20%. Our average total interest-bearing liabilities increased by $50.9 million, or 13.59%. Our average cost of total interest-bearing liabilities decreased 101 basis points from 4.68% to 3.67%. Our markets are extremely competitive for deposits. For the nine months ended September 30, 2008, our net interest spread was 2.53% and our net interest margin was 2.96%. For the nine months ended September 30, 2007, our net interest rate spread was 2.59% and our net interest margin was 3.13%.
Provision for Loan Losses. Based on the uncertainty of the local and national economy, trends in the level of delinquent and classified loans as well as the over all growth of the loan portfolio, the Bank made a $1,155,000 provision for loan losses during the nine months ended September 30, 2008. No
provision was made for loan losses during the nine months ended September 30, 2007. Provisions for loan losses are charged to income to maintain the allowance for loan losses at a level deemed appropriate by management. Loan recoveries of previously charged-off loans were $32,000 during the nine months ended September 30, 2008, offset by $277,000 of loan charge-offs. At September 30, 2008, we had non-accrual loans in the amount of $2.6 million of which $2.2 million is related to an independent retail grocer and meat market, while the allowance for loan losses increased $910,000 to $5.4 million, or 1.28% of total loans. At September 30, 2007, we had non-accrual loans in the amount of $266,000, while the allowance for loan losses decreased $80,000 to $4.1 million, or 1.14% of total loans. The Bank holds secured positions in these non-accrual loans. At December 31, 2007, the Bank had non-accrual loans in the amount of $700,000, while the allowance for loan losses stood at $4.5 million, or 1.20% of total loans.
Non-Interest Income. For the third quarter of 2008, non-interest income increased $731,000, or 37.53%, to $2.7 million from $1.9 million for the same period the prior year. Changes for the nine months ended September 30, 2008 include an increase of $118,000 in service charges and fees on deposits, an increase of $2,000 in brokerage related income, an increase in gain on sale of other real estate of $581,000 realized substantially from the re-sale of property originally foreclosed during 2004 from a single borrower, an increase in cash value of life insurance of $12,000, an increase in gain on sale of investments of $26,000, an increase in mortgage brokerage activities of $27,000 and a decrease in all other non-interest income of $35,000.
Non-Interest Expense. We strive to maintain levels of non-interest expense that we believe are appropriate given the nature of our operations and the investments in personnel and facilities that have been necessary to generate growth. For the nine-months ended September 30, 2008, total non-interest expense increased $271,000 from the prior period. Salary and employee benefit expenses increased $38,000. Deposit and other insurance expense increased $60,000 as a result in increases charged by the FDIC for deposit insurance. Occupancy and equipment costs decreased $69,000 reflecting decreased depreciation expenses and the termination of an automobile lease, advertising expense increased $85,000. Office supplies and postage increased $15,000. Professional and other services increased $148,000 primarily due to increases in legal services and data processing and other outside services decreased $69,000 reflecting cost reductions gained in contract renegotiations and less reliance on outside information technology technicians.
Provision for Income Taxes. Our provision for income taxes, as a percentage of income before income taxes, was 32.98% and 30.50%, respectively, for the nine months ended September 30, 2008 and 2007. The increase in the tax rate accrual is due to a decrease in tax-free federal and state income.
Market and public confidence in our financial strength and in the strength of financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital resources.
Liquidity is defined as our ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. Management measures our liquidity position by giving consideration to both on-and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities; investment securities eligible for pledging to secure borrowings from dealers and customers pursuant to securities sold under repurchase agreements; investments available for sale;
loan repayments; loan sales; deposits; and borrowings from the FHLB and from correspondent banks under overnight federal funds credit lines. In addition to interest rate-sensitive deposits, the Bank's primary demand for liquidity is anticipated fundings under credit commitments to customers.
We have maintained an adequate position of liquidity in the form of cash, interest-bearing bank deposits, federal funds sold, investment securities and loans held for sale. These aggregated $84.2 million at September 30, 2008 compared to $76.2 million at December 31, 2007. Supplementing customer deposits as a source of funding, we have the ability to borrow up to $92.0 million from the FHLB, subject to collateral constraints, with $33.0 million outstanding at September 30, 2008 and $49.0 million at December 31, 2007. All borrowings with FHLB must be adequately collateralized. We believe that our combined aggregate liquidity position is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.
At September 30, 2008, the Company's average equity to average asset ratio was 7.13%, and all of the Bank's capital ratios exceeded the minimums established for a well-capitalized bank by regulatory measures. The Bank's tier I risk-based capital ratio at September 30, 2008 was 10.20%.
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